Banking

Finance Adviser Dr Salehuddin Ahmed today (25 August) said the United States (US) will soon enhance support for Bangladesh to develop the agriculture sector.

“We have no debt with the US. They always helped us with grants. That’s why I asked them to help out more. They will soon help the agriculture sector. And in some cases, they will send high level teams. Those teams will have discussions. They didn’t disclose who would come,” he said

The finance adviser said this while talking with reporters after meeting with Helen LaFave, the Charge d’Affaires of the US Embassy in Dhaka, at the Finance Ministry.

During the meeting, Salehuddin said he urged the US to invest more in the country’s energy and climate sectors.

“The US is very important to us. Economically, they are very important. The US has a big investment in the coastal regions of Bangladesh. The US is helping us in different areas, including the agriculture sector. The main thing is that I have talked about investing more in agriculture, energy, climate and other sectors,” he said.

He said they have also discussed what can be done to develop the country’s technical sector.

“I have given special focus to the flood. We also discussed the private sector, especially Bangladesh Garment Manufacturers and Exporters Association [BGMEA] and Generalised System of Preferences [GSP],” he added.

Bangladesh Bank (BB) is expected to hike the policy rate or repo rate by 50 basis point to 9 percent from the existing 8.50 percent next week to tame skyrocketing inflation.

Inflation hit 11.66 percent in July, the highest at least since fiscal year 2010-11, driven mainly by food prices, reflecting the worsening situation of the purchasing capacity of people, according to the Bangladesh Bureau of Statistics (BBS).

Bangladesh concluded fiscal year 2023-24 with consumer price index at 9.73 percent, much higher than the authorities’ target of 7.5 percent. This was the fifth year that inflation overshot the goal of government.

And the first month of the FY25 showed no sign of easing.

At a press briefing yesterday, BB Governor Ahsan H Mansur said the policy rate or repo rate, at which commercial banks borrow from the central bank, would have to be hiked until inflation cools down.

An increase in the policy rate is expected to lead to bank borrowing turning costlier, for which people will cut down on expenditures, thereby curtailing demand and subsequently bringing down inflation.

“We are going to hold a meeting of the monetary policy committee early next week and hope to announce the new rate later,” BB Governor Ahsan H Mansur told The Daily Star later.

He hoped for the inflationary pressure to come down within seven to eight months. It is expected to come down to 5-6 percent then, he said.

A senior official of the central bank, seeking anonymity, said in the first phase, the policy rate is going to be hiked by 50 basis points.

In an interview with the BBC recently, the newly appointed governor said the rates would be hiked to 10 percent or more in the coming months to tame inflation.

The BB last increased the policy rate on May 8 by 50 basis points to 8.5 percent in line with the prescription of International Monetary Fund (IMF) in its fight against the spiralling prices.

Since inflation has stayed above 9 percent, the BB has been following a contractionary policy stance in its efforts to reduce demand and contain prices. It has raised the policy rate several times since May 2022 to increase the cost of money.

But the BB has been much behind the rest of the world in raising policy rates and making them more potent.

The BB started to increase the repo rate in May 2022 as inflation went up following a sharp increase in commodity prices driven by the crisis brought on by the Russia-Ukraine war. The rate has since been revised upwards.

But the hikes had not yielded the expected results as funds were still cheaper owing to the 9 percent interest rate ceiling, which had been in place since April 2020.

The central bank, however, fully withdrew the lending rate cap on May 8 of this year to meet conditions attached to an $4.5 billion loan of International Monetary Fund.

But higher inflation has already brought about a cost-of-living crisis.

The Bangladesh Bank instructed state-run Sonali Bank to classify the Tk 106 crore loans taken by Orion Infrastructure Ltd as defaulted since the client repeatedly failed to repay on time.

The state-run bank was also asked to properly classify the loans by August 22 and report it to the Credit Information Bureau.

“We already requested the client to repay the loans immediately. If they fail, then we will classify it as a bad loan and inform the central bank,” Md Afzal Karim, managing director of Sonali Bank, told The Daily Star yesterday.

A central bank document showed that Orion Infrastructure’s outstanding loans were classifiable under the bad and loss category till December last year.

The company failed to repay four instalments till then.

However, the loans of the company were kept unclassified upon special approval from the central bank.

The central bank last year said Sonali Bank could keep the loans unclassified under the condition that the unpaid instalments would be cleared within May 2024.

Afterwards, a central bank inspection found that the client repaid only Tk 2 crore in cash and provided 15 cheques to repay over Tk 15 crore until July 11.

As a result, the bank showed the loans as unclassified as of June 30.

However, those cheques are yet to be encashed, so there is no scope to show the loans as unclassified, according to central bank instructions.

It said that the entire loans of the company are classifiable under the bad and loss category as there are outstanding instalments.

Sonali Bank disbursed the loans to Orion Infrastructure for the construction of Mayor Mohammad Hanif Flyover in Dhaka.

Till December last year, the company owed around Tk 30 crore as the principal amount and Tk 75.80 crore as interest, central bank documents showed.

Salman Obaidul Karim, managing director of Orion Group, told The Daily Star yesterday that some adverse business conditions had been created over the past few months, which resulted in the company being unable to pay on time.

“We have not defaulted on any payments yet to the best of my knowledge,” he added.

Six banks including four Shariah-based ones are still facing a deficit in their current accounts with the central bank despite special liquidity support.

The banks are National Bank, First Security Islami Bank (FSIBL), Social Islami Bank, Union Bank, Global Islami Bank and Bangladesh Commerce Bank. Chattogram-based business giant S Alam Group has controlling stakes in all banks save for National Bank.

As of August 7, the six lender’s current account deficit with the Bangladesh Bank stood at Tk 14,621 crore. If their cash reserve ratio deficit is considered, their total shortfall is Tk 20,774 crore, according to data from the central bank.

The shortfall in the lenders’ current accounts with the BB means they are in deep crisis, said a senior official of the central bank on the condition of anonymity.

Generally, banks have to maintain a current account with the central bank for different clearing payment systems and they have to maintain a hefty balance in the account.

In theory, the central bank can restrict those banks from the clearing platforms due to their current account deficit, said the BB official.

“The shortfall means the lenders are in deep crisis,” said another senior official of the central bank seeking anonymity.

The shortfall came despite the BB providing special liquidity support to the banks for more than a year, the official added.

The BB’s special liquidity support was equivalent to the deficits in the lenders’ current account.

As of August 7, the outstanding liquidity support to six lenders stood at Tk 14,621 crore.

Of the six banks, the highest current account deficit is of FSIBL, whose chairman is S Alam Group’s chairman Mohammad Saiful Alam. The Shariah-based bank’s deficit is Tk 6,693 crore, according to BB documents.

Alam’s wife Farzana Parveen and four other relatives are on the board of FSIBL.

Social Islami Bank, whose chairman is Alam’s son-in-law Belal Ahmed, has the next highest current account deficit: Tk 2,877 crore.

National Bank — where Ratna Dutta, wife of S Alam Group executive director Subrata Kumar Bhowmick, is a board member — came in at third spot with a deficit of Tk 2,586 crore, followed by Union Bank (Tk 2,097 crore).

Alam’s siblings Halima Begum, Osman Goni and Md Rashedul Alam along with his wife Marzina Sharmin and nephew Mohammad Mostan Billah Adil are on the board of Union Bank.

Bangladesh Commerce Bank, which has had weak financial indicators for years, faces a deficit of Tk 336 crore in its current account, while Global Islami Bank’s deficit stood at Tk 32 crore.

“A lender should never have a deficit balance in its current account,” said Mohammed Nurul Amin, former chairman of the Association of Bankers Bangladesh, a platform of banks’ chief executives and managing directors.

The central bank should penalise the bank if it ends up with a current account deficit.

“When that does not happen, and the central bank instead provides liquidity support, we can guess in which direction our banking sector is heading,” said Amin, also the former managing director of Meghna Bank.

When a commercial bank’s current account with the central bank turns negative, the BB can provide loans to the bank against “promissory note” for a short period of time, said three BB officials involved with the proceedings.

A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms and conditions.

However, the BB was providing special liquidity support to the banks without any securities on the instruction of former BB governor Abdur Rouf Talukder.

A few months ago, when asked why liquidity support was continually provided to the banks, Talukder told journalists that it was done at the governor’s discretion.

“The support was provided in the interest of the country’s banking sector,” BB spokesman Md Mezbaul Haque told The Daily Star recently.